Over the past week, the dollar made a successful attempt to strengthen. Nevertheless, the growth was rather moderate and on Friday, it even had to turn around in relation to the euro.
In many respects this is due to the ambiguous statistics in the US. First, production orders dropped by 0.1%, which raises concerns about consumer activity. Then, the index of business activity in the service sector fell from 55.3 to 54.5 while the composite index went to 54.5 from 55.2. Data presented by ADP showed an increase in employment by 190 thousand against the previous month's 235 thousand. Nevertheless, the data turned out to be slightly better than the forecasts and, taking into account the upcoming publication of the report of the Ministry of Labor, the market took it to heart. On Thursday, there were data on applications for unemployment benefits which encouraged investors even more. The number of primary applications decreased from 238 thousand to 236 thousand and repeated from 1,960 thousand to 1,908 thousand. The data were better than forecasts so the optimism was well-founded. However, the data of the Ministry of Labor forced us to think seriously. Of course, the unemployment rate remained unchanged but the rest of the data causes too many questions. In particular, 228 thousand new jobs were created which in itself is not bad. However, according to updated data, 244 thousand new jobs were created in the previous month and not 261 thousand, as previously thought. So there is a clear slowdown in the pace of creating new jobs which does not bode well. The growth rate of the average hourly earnings accelerated from 2.4% to 2.5% with a 2.7% expectation. Despite this, the most interesting is that the average length of the working week has grown from 34.4 hours to 34.5 hours. In other words, the American employee began to work more which slowed the growth of the average hourly pay. This indicates that employers have fewer reasons for creating new jobs. Of course, this is only according to one month's data. It is difficult to make forward-reaching conclusions but the situation is exacerbated by the fact that a meeting of the Federal Commission for Open Market Operations will take place one of these days.
It can't be said that European statistics were as happy. In fact, the statistics helped strengthen the dollar. The rate of growth in producer prices slowed from 2.8% to 2.5% which, of course, bury all hopes for a further increase in inflation in Europe. The index of business activity in the service sector increased from 55.0 to 56.2 and the composite index from 56.0 to 57.5. However, there is nothing to rejoice for as the growth rate of retail sales decreased from 4.0% to 0.4%. Although, at the end of the week, there was a reason for joy as economic growth accelerated from 2.3% to 2.6% while everyone expected it to be at 2.5%.
The pound has fallen in price somewhat less than the euro since it has already helped its statistics. In particular, the index of business activity in the construction sector increased from 50.8 to 53.1 but in the services sector, it declined from 55.6 to 53.8. According to Halifax, the growth in housing prices slowed from 4.5% to 3.9%. While all this seriously put pressure on the pound, it received support from data on industrial production which accelerated from 2.5% to 3.6%.
Now, we are just waiting for a crazy week as there will be meetings from three central banks. Despite the mixed data on the US labor market as well as the ambiguous content of the minutes of the meeting of the Federal Commission for open market operations, there is virtually no doubt that the Fed will raise the refinancing rate from 1.25% to 1.50%. This is indicated by the stable inflation and low unemployment. Naturally, this eclipses everything else and if the expectations are met, then the dollar will receive an excellent stimulus for growth. In addition, it is projected that the growth rate of producer prices will accelerate from 2.8% to 2.9% and inflation will accelerate from 2.0% to 2.2%. With such dynamics for inflation, you can't pay attention to the latest data on the labor market. Moreover, the report of the Ministry of Labor reflects only temporary negative signals which can't be turned into a stable trend. However, the growth rate of retail sales should slow from 4.6% to 4.3%. This will be offset by industry growth from 2.9% to 3.0%.
No one expects any progress or encouraging statements from the ECB. People only expect words that present an opportunity to raise the refinancing rate even under the conditions of the continuation of the quantitative easing program. The situation can also be improved by the words that the program of quantitative easing itself can be completed ahead of schedule. However, the probability of all this is close to zero. Against this background, the growth of industrial production is expected to accelerate from 3.3% to 3.4%. However, against the background of an increase in the refinancing rate, the Fed will not make any impression.
A similar picture is in the UK where the Bank of England said earlier that by 2020 it will raise the refinancing rate only two times. So, in the coming year nothing interesting will happen. And against the background of an increase in the rate of the Fed, all other data will be extremely light. However, inflation and unemployment must remain unchanged and their values are already in the position to raise the rate at an accelerated pace. Retail sales, which are still down by 0.3%, can show an increase of 0.3%.
In general, everything will depend only on the decision of the Fed. If the rate is raised, which will most likely happen, then the dollar will skyrocket.
The EUR/USD pair may finish the week at 1.1575.
The GBP/USD pair should decline to 1.3150.
Only the Fed's refusal to raise the refinancing rate may lead to a different development of events.